Retaining Electronic Records • Guide on Market Segment Specialization Program • IRS Restructuring Updates on LMSB, SBSE and Appeals

Editor:

Mark H. Ely, J.D., CPA
Partner
Washington National Tax
KPMG LLP
Washington, DC

Editor's note: Mr. Ely is former chair of the AICPA Relations with the IRS Committee. Ms. Totsch, Ms. Butler and Mr. Black are committee members.

Electronic Record Retention Requirements Systems

The IRS objective under the Internal Revenue Service Restructuring and Reform Act of 1998 is to have 80% of all returns filed electronically by 2007. As a result, an effort is being made to increase dramatically the number of electronically filed returns. This has raised questions about the retention of electronic tax data for individuals as well as for businesses. With the magnitude of transaction detail created by a corporation in the normal course of business, electronic retention of such records becomes absolutely crucial. Further, as companies turn increasingly to Internet-brokered transactions and a paperless environment, if they do not retain detailed records electronically, backup information will not be available to explain or verify transactions.

Retention Requirements

The recordkeeping requirements of Sec. 6001 apply to all taxpayers (including businesses), regardless of whether returns are filed electronically. Under Regs. Sec. 1.6001-1(a), taxpayers must keep all books and records (including inventory) sufficient to document the income, deductions, credits and other items included in a tax return. Under Regs. Sec. 1.6001-1(e), taxpayers must retain books and records as long as the contents might become material to the administration of any internal revenue law.

Rev. Proc. 98-25 amplifies Sec. 6001 by giving taxpayers comprehensive guidance on requirements for keeping electronic tax records and providing the Service access to them. The procedure applies not only to electronically maintained income tax records, but also to excise, employment and estate and gift tax records, as well as tax records for employee benefit plans and exempt organizations. Citing Regs. Sec. 1.6001-1(e), Rev. Proc. 98-25 requires taxpayers to retain electronic or machine-sensible records used to record the business activities of a venture. Such materiality would continue at least until the end of the statutory period of limitations (including extensions) for each tax year. When considering a net operating loss carryforward (up to 20 years) or fixed-asset information until its disposal or full depreciation (up to 40 years for certain real property), the period for some data retention goes well beyond the basic three-year statute of limitations for a standard tax return.

Rev. Proc. 98-25 provides that machine-sensible records must provide sufficient information to support and verify entries made on the taxpayer's return and to determine the correct tax liability. This requirement is met only if the electronic records reconcile with both the taxpayer's books and return. The electronic records must also contain adequate transaction-level detail so that the information and the source documents supporting the records can be identified.

All machine-sensible records that require retention must be capable of being processed. The revenue procedure defines "capable of being processed" as the ability to retrieve, manipulate, print hardcopy and produce output on electronic media. Additionally, such records must be capable of being produced on the IRS's request.

As companies continue to emphasize operational productivity and administrative efficiency to maintain competitiveness, they require increasingly sophisticated tools to support their internal business processes. This often entails the implementation of new technologies, including the update of enterprise resource planning (ERP) systems. Failure to cover all bases during conversion to new systems, which includes assurance that prior system data is available, could prove costly.

Under Rev. Proc. 98-25, if any machine-sensible records are lost, stolen, destroyed, damaged or otherwise no longer capable of being processed, the taxpayer must promptly notify the District Director (or the equivalent under the new IRS structure) and provide a plan that demonstrates how it will continue to meet all of the requirements of Rev. Proc. 98-25 for the affected records.

Unfortunately, companies that replace obsolete and outdated hardware and software systems with the latest ERP systems do not always consult their tax department. Although not an easy task, companies must maximize interdepartmental coordination between tax and information technology to reduce the risk of not complying with electronic record retention requirements. In addition, proper configuration of the system for tax purposes can be done only prior to ERP implementation. This saves a considerable amount of money, as fewer adjustments would have to be made to a fully operational system.

If the new system cannot process the machine-sensible records maintained by the original system, the taxpayer must notify the District Director and propose a plan for assuring that the electronic records created and maintained by the original system continue to be capable of being processed. If the data is not accessible, the Service could require the taxpayer to recreate or reprocess a complete set of accounting records on a compatible system or to reformat the data.

If the IRS discovers on audit that the taxpayer could not trace electronic transactions back to their original source documents, it could theoretically disallow many business expenses for lack of documentation. In addition, taxpayers incur penalties for failure to comply with Rev. Proc. 98-25, including the Sec. 6662(a) accuracy-related civil penalty and the Sec. 7203 willful failure criminal penalty.

Record Retention Agreements

Rev. Rul. 71-20 offers taxpayers the potential to alleviate some of the electronic record retention burden with a Record Retention Agreement (RRA), limiting the responsibility to a select list of records. Rev. Proc. 98-25 modified the RRA procedure, substituting a Record Retention Limitation Agreement (RRLA) in most cases for an RRA. Like an RRA, the RRLA provides for the maintenance of electronic records as agreed on by the District Director and the taxpayer, but it reverses the concept. While it can specifically eliminate retention of machine-sensible records not pertinent to Federal tax matters that may surface in future IRS examinations, by default it requires retention of everything else. The taxpayer initiates a request to the IRS to enter into an RRLA, identifying all records that it feels should not be retained and explaining why those records will not become material to the administration of any internal revenue law. The District Director decides whether or not to enter into an RRLA with the taxpayer.

Companies should analyze the need to address their data archival requirements for tax purposes. If a company implements an ERP system without IRS electronic record retention in mind, it may not be in compliance with Rev. Proc. 98-25. A tax record retention solution must select and extract complete content, and provide mechanisms to store and retrieve data. It is imperative that record retention services be considered when:

1. The company's Federal (and state) returns are prepared from summary computer-generated financial reports, such as a general ledger and an income statement.

2. There is potential difficulty in tracing specific account or return line items back to original detailed source documents.

3. The company has implemented an ERP software package.

4. The company's internally developed financial system is based on relational database technology.

Conclusion

Taxpayers' electronic record retention responsibilities are in addition to their responsibility to retain hardcopy records created or received in the ordinary course of business, as required by long-standing law and regulations. Companies may retain hardcopy in microfiche or microfilm format in accordance with Rev. Proc. 81-46. Alternatively, Rev. Proc. 97-22 addresses the use of an electronic imaging storage system. While they may contain automated or electronic features, these other storage arrangements are not a substitute for the machine-sensible records that companies must retain under Rev. Rul. 71-20 and Rev. Proc. 98-25.

From Melissa W. Totsch, CPA, Ernst & Young LLP, Dallas, TX

Market Segment Specialization Program Audit Guide for Shareholder Loans

On April 25, 2001, the IRS released a Market Segment Specialization Program audit guide that contains audit techniques for shareholder loans. The guide explains how to determine whether a shareholder loan is a bona fide debt or a constructive dividend. It also contains examples of how below-market term and demand loans affect corporations and shareholders.

An IRS agent must determine if an advance to the shareholder is bona fide debt. The primary determination hinges on the question of whether, when the loan was made, there was a genuine intent that the funds would be repaid. The guide states that in answering this question, the courts have not looked to mere labels or to the parties' own testimony, but to the transaction's facts and circumstances. Over the years, a set of common-law factors for determining bona fide debt has emerged. The determination is not an exact science and no single factor is determinative.

The key factors in determining if a debt is bona fide are:

1. The extent to which the shareholder controls the corporation;

2. Whether security is given for the advance;

3. The shareholder's ability to repay the advance;

4. The corporation's current or accumulated earnings and profits;

5. Presence of a repayment schedule or an attempt to repay the advance;

6. Set maturity date to the "debt";

7. Interest (if any) charged on the advance;

8. The corporation's ability to force repayment if the shareholder fails to make the required payments;

9. The magnitude of the advances;

10. Existence of a ceiling limiting the amount the corporation advanced; and

11. The corporation's dividend history.

According to the guide,

[I]t cannot be emphasized enough that the...factors must be viewed as a whole. Any factor considered on its own will probably not be determinative. The purpose for analyzing the above-stated factors is to determine the parties' intent at the time of the distribution. In addition, this list of factors is not all-inclusive. Any facts that may provide insight into the parties' intent at the time of the distribution should be developed.

The guide discusses the following points, which also help an agent in determining whether the debt is bona fide:

• The taxpayer may be held to its reporting position.
• Two related judicial doctrines, equitable estoppel and duty of consistency, are available to prevent a taxpayer from treating an item in a certain manner for one tax year but, after the expiration of the statute of limitations, attempting to treat the item in an inconsistent manner in later years.
• In the case of an S corporation, if the corporation reasonably compensated the shareholder, part of the advance might need to be reclassified as compensation and therefore subject to employment taxes.

The guide concludes with a detailed discussion of below-market loans and the rules under Sec. 7872. It gives extensive examples that show how to compute forgone interest in a below-market demand and term loan.

From Kimberly A. Butler, Coca-Cola Enterprises Inc., Atlanta, GA

The LMSB Division Blazes IRS Restructuring Trail

The Large and Mid-Sized Business (LMSB) division emerged in June 2000 with the promise of radically changing the relationships between the IRS and its largest taxpayers—the approximately 250,000 entities with assets in excess of $5 million. As it approaches its first anniversary, LMSB has pushed forward some innovations that have drawn support from its constituency and will likely be adapted for use in the other three divisions. While LMSB's first-year efforts have earned positive reactions from many, huge challenges remain for it and for the Service's overall restructuring. Practitioners will continue to be challenged to interpret the many new signals coming from the IRS and to navigate their clients through its many new processes.

The Small Business/Self-Employed Division (SBSE) faces challenges even more daunting. As heir to most of the field enforcement and a substantial part of customer service personnel, SBSE has to confront some of the most complex transition issues.

IRS Restructuring

The Service spent a massive amount of time and money this past year in moving the human, physical and financial assets from their functional and geographical roots to the four new customer-based divisions. As the one-year mark approached, the old boxes had been replaced by new structures. Nearly 100,000 employees were reassigned to the new organizations. Assistant Commissioners, Regional Commissioners, District Directors, Division Chiefs and District Counsel have given way to Industry Directors, Area Directors, Territory Managers, Industry Counsel, Area Counsel and a variety of other new positions.

On the surface, the new structures appear to have settled in place. However, on close examination, the IRS is still wrestling with hundreds of transition issues. In addition to the gargantuan effort involved in restructuring virtually every facet of the organization, it has also pressed to fulfill the many additional mandates of the Internal Revenue Service Restructuring and Reform Act of 1998, to improve its overall customer service and convince Congress that it possesses the capability to accomplish the long-awaited systems modernization.

PFAs: An Early Success

The LMSB division has advertised its interest in fundamentally altering the relationships between the IRS and taxpayers. One of the guiding principles of the restructuring has been to encourage pre-filing initiatives, which address questions and potential conflicts earlier and less expensively.

During 2000, the LMSB conducted a pilot of a pre-filing agreement (PFA) initiative (see Tax Practice & Procedures, "Update on New IRS Resolution Programs," TTA, January 2001, p. 62). The theory behind the initiative was that both taxpayers and the government would benefit from resolving issues up-front—prior to filing a return—rather than years later when the return is under audit. This theory is most persuasive, when the choice is between solving a problem now or solving it later when key personnel and records may be less available. Not all taxpayers have been persuaded that the new ways are for their benefit. Some, influenced by reports of the decline in the Service's enforcement activity, have concluded they are better off playing the audit lottery—betting that the IRS will not raise the issue on audit or, if it does, it will not have the capacity to see it through. Other taxpayers have welcomed the opportunity to secure certainty on the treatment of an issue before it ever goes on the return.

In a congressionally mandated report made public on April 6, 2001, the Service evaluated its PFA pilot. According to the report, it received 19 applications, spanning all five of the LMSB industry segments. The IRS accepted 12 applications and completed seven PFAs by the end of 2000. Four PFAs were still in process when the report was published and one had been withdrawn. The seven PFAs executed involved the following issues:

• Valuation of assets—valuation of a covenant not to compete: The Coordinated Examination Program (CEP) examination team and the taxpayer agreed that no amount was allocable to a covenant not to compete in a purchase transaction.
• Valuation of assets—valuation of patents contributed to a charity: The CEP examination team and taxpayer reached a determination on the valuation of patents based on their market value.
• Methods of accounting—accounting for a contract newly entered into, using an accrual method instead of a long-term contract method proscribed under Sec. 460: The examination team determined that an accrual method was the appropriate method and that an accounting method change under Sec. 446 was not required because the change in treatment resulted from a change in the underlying facts.
• Method of accounting—change in method of accounting for depreciable property that the taxpayer believed had been misclassified: The examination team agreed with the taxpayer's revised classification and with the taxpayer's proposal to automatically change its method of accounting for depreciation. The team and the taxpayer reached agreement on the appropriate Sec. 481 adjustment.
• Expense vs. capitalization—determination of the amount to be capitalized in a large repair expense account using a statistical model: The issue was resolved using a statistical methodology that had been used in an earlier audit, and an agreement was reached on the portion of the account that would be subject to capitalization.
• Stock-basis computation—computation of tax basis of stock acquired in a reorganization transaction that qualified under Sec. 368(a)(1)(B): The report indicates that the examination team agreed with the taxpayer's computation of stock basis under Sec. 362(b).
• Investigative costs—treatment of costs incurred to acquire a business: The taxpayer proposed that certain of the costs were investigatory in nature and therefore deductible under Sec. 162. Based on the principles contained in Rev. Rul. 99-23, the examination team and the taxpayer agreed on which items were Sec. 162 costs and which were Sec. 263 costs.

The report did not explicitly identify the issues surrounding the four in-progress PFAs, but from speeches and other press accounts, it appears that all four involve the research credit.

The Service calculated that it took from 110 to 228 days (with an average of 166 days) to complete a single PFA. In addition, the total number of hours of "direct examination time" expended by taxpayers and the IRS for the seven completed PFAs was 1,976 and 1,114, respectively.

After determining the pilot a success, the Service issued Rev. Proc. 2001-22, making the PFA program permanent. Under the permanent program, PFAs are now available to all LMSB taxpayers, including those not under examination. The criteria for a PFA under the permanent program are similar to the pilot:

• Suitability of the issue presented for the LMSB PFA program;
• The direct or indirect impact of an LMSB PFA on other years, issues, taxpayers or related cases;
• The availability of IRS resources;
• The ability and willingness of the taxpayer to dedicate sufficient resources to the LMSB PFA process;
• The likelihood that the PFA may result in two or more persons taking contrary positions on an item or transaction (whipsaw);
• The time remaining until the due date of the return to which the PFA relates; and
• The overall probability of completing the process and entering into a PFA by the due date for filing the taxpayer's return.

A taxpayer is not entitled to a conference to appeal a decision not to go forward with the PFA process. A taxpayer not selected for the PFA program remains eligible for other procedures for early resolution, including the Accelerated Issue Resolution program (see Rev. Proc. 94-67).

Under IRS Delegation Order No. 262 (Rev. 1), dated March 3, 2001, the Commissioner and Deputy Commissioner of LMSB, LMSB Industry Directors and LMSB Directors of Field Operations have the authority to enter into and approve pre-filing agreements described in Rev. Proc. 2001-22 (and any successor revenue procedure). Under Rev. Proc. 2001-22, the LMSB Industry Director (or his designee) with jurisdiction over the taxpayer will make the final decision whether to proceed with the PFA.

The Service is actively promoting the use of PFAs. Certain managers within the LMSB have performance objectives aimed at encouraging taxpayers to use them. Predicting how widespread PFAs will become is difficult. There is no recipe for determining when a PFA is a good idea. Those who have successfully entered into PFAs have been complimentary about both the process and the substantive result. Others have shunned PFAs, believing there was more risk than reward in highlighting issues to the IRS. Ultimately, whether a taxpayer pursues a PFA is a combination of substantive and environmental considerations. For some taxpayers, the certainty associated with settling an issue in the pre-filing stage would be valuable—it may materially affect the treatment of a specific transaction for financial reporting purposes, and may even affect the dynamics of a particular merger or acquisition. Other taxpayers would be more comfortable confronting an issue (if at all) within the confines of what they might see as the more predictable audit process.

IIR Pilot

While PFAs are aimed at individual corporate taxpayers that seek certainty about how standard legal principles apply to particular transactions, the LMSB's new Industry Issue Resolution (IIR) program is aimed at groups of corporate taxpayers that have struggled with specific existing administrative guidance. Under the IIR, industry groups are encouraged to identify instances in which existing administrative guidance is administered inconsistently, is out of step with current business practices or is at the center of protracted examination contention between the Service and taxpayers in a specific industry segment.

On Dec. 11, 2000, with the publication of Notice 2000-65, the IRS invited applicants for a pilot IIR program. It received 24 applications from businesses, tax practitioners and associations, which suggested that there are issues common to many large-business taxpayers. The applications addressed issues within all the industry segments, with Financial Services and Healthcare attracting the most, with nine proposals. Taxpayers from the Retailers, Food and Pharmaceutical industry submitted six applications, Heavy Manufacturing, Construction and Transportation supplied five, while the Communications, Technology & Media industry and Natural Resources industry each contributed two applications.

On April 26, 2001, based on the guidelines listed in Notice 2000-65, the Service announced its selection of seven industry issues for the IIR pilot program:

1. Allowance for depreciation on certain golf course improvements;

2. Clarification of the conformity election by banks for bad debts;

3. Taxability of demonstrator automobiles provided to salespersons;

4. Reporting of payments to employees who own heavy equipment used by their employers;

5. Treatment of local impact fees and similar costs on low-income housing tax-credit property in determining basis;

6. Determination of recoverable reserves of oil and gas for cost depletion purposes; and

7. Allocation of cost of restaurant smallware packages between allowable expenses (Sec. 162) and capitalization (Sec. 263).

The selected IIR issues will be worked on by teams comprised of personnel from LMSB, IRS Chief Counsel and Treasury. Each team will be led by an LMSB Director of Field Operations from the industry segment with jurisdiction for the taxpayers affected. The specific rules of engagement will be worked out as the pilot program unfolds, but the Service has made clear its intention to seek maximum engagement with the stakeholders affected. However, the IRS has also made clear that it reserves the right to determine the precise form of guidance, as well as the ultimate substance of that guidance.

One distinct advantage of being selected for the IIR program is the assurance that issuance of the resultant guidance will be a guaranteed priority in the IRS/Treasury business plan. In the past, issues addressed through programs like the Market Segment Specialization Program could become bogged down at the point of guidance issuance, because the project might not have been identified early enough to be included.

The Service has set Nov. 30, 2001 as its target for completing the IIR pilot. If the pilot proves successful, the program will become permanent. IIR issue resolution requires resources from the Service, Chief Counsel and Treasury. Because these resources would otherwise be devoted to other business-plan priorities, a permanent IIR program is likely to cover only a limited number of issues at any given time.

New Audit Process

LMSB's next target for innovation is what it is calling the "post-filing process"—otherwise generally already known as the audit process.

LMSB is currently circulating three questions among large taxpayers, encouraging them to fuel the audit redesign effort through their responses:

1. What tax administrative issue, policy or procedure currently causes the most difficulty during an audit?

2. What could LMSB do in the near term to speed up the audit process and achieve greater currency?

3. How could LMSB get certainty that a tax return is accurate without performing an audit?

The IRS plans to retool the LMSB audit process in 2001.

LMSB's early impact on its constituent taxpayers has provided some of the most tangible evidence of the progress of overall IRS restructuring efforts. While LMSB has admittedly taken only its first steps on a planned path that it believes can fundamentally improve its performance, it has succeeded in creating a sense of forward momentum.

SBSE Restructuring Pushes Forward

The SBSE faces daunting challenges in creating for itself a sense of forward momentum similar to that of LMSB. As the heir to most of the field enforcement and a substantial part of the customer service personnel, SBSE has had to confront some of the most complex transition issues.

Examination and collection personnel, accustomed to a district structure within which they were supervised by functional (collection or examination) division and branch managers, now report to cross-functional territory managers and area directors who oversee far-flung geographical jurisdictions.

The new lines of authority extend from group managers through territory and area managers, which feed directly into the National Office. On one level, the direct reporting structure promises nationwide consistency. On another, it may strike field agents and officers as overcontrol by Washington. Complicating matters further is the fact that there are a variety of organizations within SBSE—all operating through somewhat parallel area and territory substructures.

Unlike the old frame of reference, in which a District Director oversaw most IRS activity within a geographical area, the new SBSE structure may result in multiple centralized chains of command, affecting taxpayers and issues within a specific geographical area. Two examples help outline SBSE's structural challenge. In the first circumstance, the 16 Compliance Area Directors appear to be in control of all audits and collections within their defined geographical areas. This is true insofar as the actual supervision of work-in-progress is concerned. However, two separate organizations—both of which report directly to Washington, and are not supervised by the Compliance Area Director—are actually responsible for selecting the work done by the agents and officers and for closing and reviewing the quality of their work.

The second circumstance that demonstrates SBSE's structural challenge is found in the parallel responsibilities held by the new Taxpayer Education and Communication (TEC) structure. TEC is overseen by eight Area Directors, who are responsible for outreach, education and communication within the same customer segment that SBSE's Compliance Area Directors oversee audit and collection activity. Managing the boundaries between outreach resources designed to improve future compliance and compliance resources examining past and current compliance will likely be one part science and one part art.

Just in case SBSE was not sufficiently challenged by the complexity of restructuring, it has also become embroiled in the public debate over the drop-off in enforcement activity. One part of the solution will be found in the IRS's authority to hire new personnel, provided in the fiscal-year 2001 budget and in the fiscal-year 2002 administration proposal. If the hiring effort succeeds, several hundred agents and revenue officers that have been diverted to other assignments will be able to return to examinations and collections. Being able to recruit agents and officers also means that SBSE can build up its new TEC organization and replenish some of the personnel losses in compliance, which have gone unabated for most of the last decade.

SBSE Going Forward

SBSE has many challenges facing it. It began as the most complicated facet of the IRS restructuring, and remains as such. Taxpayers and their advisers will likely find that SBSE initiatives mirror those introduced by the LMSB. SBSE will also, for some time to come, likely encounter a myriad of coordination and communication challenges as it tries to complete its repositioning of personnel and responsibilities.

From Michael P. Dolan, National Director, IRS—Policies & Dispute Resolution, Washington National Tax, KPMG LLP, Washington, DC

Appeals Collection Developments

As part of the IRS reorganization, the Appeals organization has been restructured. It now has a different management configuration, new programs and streamlined processes. The new structure includes three operating divisions—Large & Midsize Business (LMSB), Small Business/Self Employed-Tax Exempt/ Government Entities (SBSE-TEGE) and Wage and Investment (W&I). The Appeals organization assigns collection cases to SBSE-TEGE and W&I appeals officers.

Since the Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA '98), Appeals has reported a steady increase in cases involving collection issues and processes. Presently, collection-related cases are 40% of Appeals' total caseload. This number represents an all-time high, and an exciting challenge and change from the historical focus on income-tax examination issues.

Background

Taxpayers gained new procedural rights and safeguards under the IRS-RRA '98, called Collection Due Process (CDP). Taxpayers can appeal proposed levy actions and a filed Notice of Federal Tax Lien. When a taxpayer opposes the filed lien or proposed levy action, he can participate in a CDP hearing, in which he has protections similar to those in dealing with other creditors (Section 3401).

During the CDP hearing, taxpayers can propose alternatives to the collection process. Most taxpayers choose installment agreements and offers in compromise (OICs) as alternatives. The Service cannot take levy action while their CDP case is in Appeals—unless the Service can show that collection is in jeopardy.

Appeals Collection Workload

CDP cases have been the fastest-growing part of Appeals collection inventory. As of February 2001, CDP represented 62% of the total collection workload. The CDP receipts in March 2001 continue the trend. Exhibits 1 and 2 present data on collection inventory and receipts for CDP, OIC, Trust Fund Recovery (TFRP), Penalty Appeals (PENAP), Collection—Miscellaneous (CO-OTHER) and the Collection Appeals Program (CAP).

OIC, PENAP and CAP cases have also been increasing. Appeals offices are preparing for increases in the OIC program because it is popular with the public and IRS Compliance can resolve these cases more efficiently.

The Appeals CDP Hearing

In each CDP case, the Appeals Officer should:

• Obtain verification from the IRS office collecting the tax that the requirements of the law and administrative procedures have been met.
• Address issues presented by the taxpayer, including spousal defense (i.e., innocent spouse), challenges to the proposed collection action, offers by the taxpayer for collection alternatives (e.g., installment agreements and OICs) and challenges to the underlying liability (if the taxpayer did not receive a statutory deficiency notice or otherwise have an opportunity to dispute the liability).
• Consider whether the proposed collection action balances the need for the efficient collection of taxes with the taxpayer's legitimate concern that the collection action be no more intrusive than necessary.

The Office of Appeals is required to address these factors during each CDP hearing (Secs. 6320 and 6330).

Appeals Officer Collection Training

Because the Appeals organization added the collection cases to the traditional Appeals caseload, it initiated an extensive training program. Appeals has about 500 appeals officers trained to resolve CDP cases. These appeals officers have completed a comprehensive training program.

In addition, Appeals has at least 65 settlement officers who are former Collection-function employees selected for their expertise in collection-related regulations and procedures. It trained them to resolve CDP cases, employing Appeals' settlement philosophy. These settlement officers have had impressive careers and experience in the former Collection function of the Service.

Other Appeals Collection Programs

CAP. On April 1,1996, the IRS implemented an administrative ap-peals program for taxpayers called CAP. Initially, the Service limited taxpayers to raising seizures, levies and liens when Appeals heard these CAP cases. Then, in July 1996, President Clinton signed the Taxpayer Bill of Rights II, granting taxpayers the right to appeal the termination of installment agreements, which was effective as of 1997 (Sec. 6159(d); see also Sec. 7122(d)). Also added to the CAP program were the discharge, subordination, and nonattachment of Federal Tax Lien and third-party claims and nominee liens. Taxpayers who request a CAP appeal now have an opportunity to have the IRS review collection actions without going to court. CAP cases are high-priority. Appeals' goal is to complete a CAP case within five days.

Offer Program. The Appeals Office has been the final arbiter of OICs proposed for rejection by the Service compliance functions. When Congress passed the IRSRRA '98, however, the right to appeal a rejected OIC became law. When Compliance (Collection or Examination) notifies a taxpayer that it proposes to reject an OIC, the taxpayer has 30 days to request Appeals consideration. Appeals then schedules a conference with the taxpayer to review Compliance's reason(s) for rejecting the OIC, discuss the taxpayer's issues and make a determination. Possible outcomes include deciding to sustain Compliance's rejection, accepting the original OIC or securing an amended OIC from the taxpayer that Appeals finds acceptable. As of February 2001, the IRS had a record number of OICs pending. It should be noted that when CDP cases increase, so does the popularity of the OIC program. This will continue to give the Appeals division new challenges.

Fast Track Mediation. As part of a pilot Appeals Fast Track Mediation Program, taxpayers may request mediation of OIC cases up to $50,000 and trust-fund recovery penalties up to $100,000. The Fast Track Mediation Program is currently available in Denver; Houston; Hartford, Connecticut; and Jacksonville, Florida. Additional information on the Fast Track Mediation Program is available at irs.gov/prod/ind_info/appeals/pub-proc.html .

Other Programs

In addition to CDP, CAP and OIC, the Office of Appeals previously considered (and continues to hear) other types of collection-related issues, such as TFRP, PENAP and jeopardy levies.

Taxpayer/Practitioner Tips

Because Appeals is independent of the IRS investigative processes, taxpayers can assist Appeals by coming to collection-related Appeals hearings (especially CDP, CAP and OIC hearings) prepared to support their cases. Unless the underlying liability is the appeal's primary focus, taxpayers should bring current, verifiable financial statements to the hearing. The Appeals office requires taxpayers to provide this information before it considers any alternatives to, or deviation from, Compliance's initial recommendations. Taxpayers help Appeals facilitate their case by providing recent bank and wage statements, loan balances and asset valuations. If taxpayers come to Appeals without documentation to support their cases, they will experience delays. Under these circumstances, Appeals must send referrals to the Compliance functions for verification of missing information. Appeals is now considering many CDP cases in which taxpayers are raising liability issues that do not meet the criteria under Secs. 6320 and 6330. However, in many of these cases, taxpayers would qualify for the Audit Reconsideration Program under new guidelines implemented in October 2000. If taxpayers used this program in a timely manner, Appeals could correct taxpayers' liabilities as necessary, and potentially stop collection notices.

The criteria for this program are:

1. The taxpayer disagrees with an assessment from an audit or denial of a credit (such as the earned income credit),

2. The taxpayer can identify the adjustment at issue, and has additional information not previously considered during the original examination; or the taxpayer contests substitute return assessments under Sec. 6020(b) by filing delinquent returns, and

3. The taxpayer has not paid the assessment or the Service reverses the tax credit in dispute.

The functional area that processed an Audit Reconsideration case is the first to consider the assessment. If the Service Center or Compliance proposes partial or full disallowance of the request, the Appeals Division offers taxpayers appeal rights in the disallowance letter. However, if Appeals makes an assessment, it also hears the request for reconsideration; see Pub. 3598, What You Should Know About the Audit Reconsideration Process, for more details about this program.

Conclusion

As Appeals approaches its 75th anniversary as the premier dispute resolution organization in the executive branch of government, it faces one of its greatest challenges to effectively deal with the many changes in the source and nature of its case work. The employees of the Appeals organization feel privileged that Congress entrusted them with ensuring independent and fair resolution of CDP cases. For assistance, taxpayers with Appeals collection-related issues can contact an Appeals Outreach Representative toll-free, at (877) 457-5055. As a result of the extensive Appeals Collection Training Program, the Appeals organization can effectively respond to the demands of the increased collection caseload of the future.

From Daniel L. Black, National Chief—Appeals, Internal Revenue Service, Washington, DC